The Investor’s Detailed Guide to the Financial Benefits of Rental Property (Real Numbers Included!)

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I was sitting with one of my mentors a couple days ago, and I was talking about one of the rental properties I own and how I lost so much money on it because it had a bad year a couple years ago. My mentor looked confused and asked me how I thought I had lost money on it. I said, “Well, it had a crazy amount of vacancy and had some repairs during that time and… ugh.” He said, “Didn’t you just refinance the property, though?” I said I had, yes.

He asked the basic numbers on the refinance, and suddenly the conversation went full-swing into the analysis of this rental property that I swore I had lost money on. The analysis provided such a cool understanding for me in terms of where the financial benefits with a rental property really come from. This was such an interesting and uplifting understanding that I want to share it with you here in case you are toying with the idea of buying rental properties or trying to better understand for yourself where the financial awesomeness is with rental properties.

Related: The BiggerPockets Rental Property Calculator

I want to first start by explaining the sources of income you can expect to see when you own a rental property. I’ll finish off with telling you some specifics about the property I own that started this whole conversation in the first place, so you can have a real world example to further illustrate what I’m talking about.

Rental Property Income Sources

How many of you truly know the ins and outs of rental property math? What makes a rental property profitable? Can you lose with a rental property? Where all does rental property income come from?

Monthly Cash Flow

This is one of the most common sources of rental property income that people strive for. Monthly cash flow is the amount of money you pocket each month after all expenses on the property are paid (taxes, insurance, repairs, mortgage, etc.). A word to the wise if you are shopping for a rental property: More properties than not don’t actually cash flow!

I want to be very clear about this cash flow thing. This is potentially one of the biggest flops that happens to new investors — they don’t know how to do the math. If you’re like me, you may have grown up believing and hearing that if you just own a rental property, that is financially smart. Wrong. Learn how to actually do the math! To learn the math for monthly cash flow calculations and how to determine if a property is expected to provide monthly cash flow, check out “Rental Property Numbers So Easy You Can Calculate Them on a Napkin.”

The only time monthly cash flow should not be a part of your consideration when shopping for a rental property is when you are specifically buying a property with hopes of appreciation. This is most common in the California cities, especially Los Angeles and San Francisco. Properties in either of those won’t allow for positive monthly cash flow by any stretch of the imagination, but those cities are known for gigantic bouts of appreciation.

Because of this, a lot of people are willing to not only forego positive monthly cash flow but actually have to pay out each month in expenses — all while waiting on the expected appreciation. I’ll hit more about appreciation in a second, but understand that receiving monthly cash flow should seriously be in your plans, unless you are purposefully going for the appreciation attempt (but don’t do that if you aren’t highly educated on that method of investing because it is, in fact, speculation).



Appreciation is awesome. As I said above, there are cities that are known for extreme appreciation. On the flip side, there are cities that are very stable and don’t appreciate much. Then, of course, there are cities that decline. But for the most part, appreciation is a pretty consistent trend — the value of a house typically goes up. This is more or less an inflation thing. But in this case, inflation is working in your favor rather than against because you get to take advantage of the increased value, regardless of how much less you paid for it. Shazam!

As I mentioned in the monthly cash flow section, investing just for appreciation is an actual method of investing. I can’t personally speak to it because I’ve never done it, but there are cities and markets out there that have pretty stable trends for insane amounts of appreciation. Timing is critical for this method of investin. Purchasing for cash versus financing is a huge consideration, as well as knowing that investing solely for appreciation is, in fact, speculation (ask all of the investors who bombed in 2009 what they think about speculation). Therefore, the risk is pretty high.

A last note about monthly cash flow and appreciation: Most markets are some kind of combination of monthly cash flow and appreciation. Some markets have only monthly cash flow and no appreciation potential. Some are good for only appreciation potential and no monthly cash flow. Some allow for good monthly cash flow with a good chance of some level of appreciation, and some may offer neither. Understanding market fundamentals is key because each variation of monthly cash flow potential vs. appreciation potential poses a different level of risk.

Tax Benefits

This is a hidden bit of income awesomeness that people don’t realize about rental properties. Tax benefits may sound lame and negligible, but they actually aren’t! Why are they relevant? Well, let me back up. Rental properties, as far as the IRS is concerned, fall under the category of “passive income.” This is important because “passive income” is taxed very differently than “active income.” You know how you get your paycheck from work and there is a huge chunk taken out for taxes? Well, that income you earned working is “active income,” and that income is taxed significantly. I mean, 30% ballpark for average tax brackets — that’s a lot of money you lose out to taxes! Well, what if you didn’t have to pay that amount in taxes? Think about it.

Related: The Ultimate Guide to Real Estate Investment Tax Benefits

Enter passive income, stage left. Without getting into the details of how all the calculations work, after all of the write-offs you get on your rental properties, your rental property income essentially becomes tax-free. Passive income just doesn’t take the same level of tax hit as active income. It’s just like if you suddenly didn’t have to donate 30% out of each paycheck. Whoa!

It’s even possible to earn extra money due to the write-offs, in addition to saving on what taxes you otherwise would have had to pay! This is due to depreciation. Depreciation assumes that your property experiences wear as time goes on, and the IRS allows for you to write that wear off. I’ll show you one of these calculations here in a minute when I tell you about my own property, but know that the depreciation write-off is especially significant when it comes to how much you get to pocket in tax benefits, in addition to any monthly cash flow and appreciation you get.

One of the coolest things about a rental property? It depreciates and appreciates all at the same time! What other asset can you think of that you get to earn income in two completely opposite directions like that?


Applying These Income Sources to an Actual Property

My reason for writing this article is not so much to just explain to you all the ways you can earn income on a rental property, but rather to use that information to circle back around to some of the things you should be considering when you start shopping for a rental property. The first consideration should always be the numbers, and the second thing should be risk levels. Each combination of monthly cash flow versus appreciation will pose different risk levels, and then of course property type and location and all that will contribute as well. For now, though, I’m sticking with the numbers.

I’d like to introduce you to one of the properties I own. I think this beaut has shown herpionner face in a previous article or two, but she’s one of my favorite ones to talk about because of how much I’ve learned from her. She also happened to be the subject of my recent conversation about numbers with my mentor.

As I mentioned earlier, my claim was that I had lost a lot of money on this property due to extreme amounts of vacancy and some repairs. But then some other things came into play that threatened to argue this claim. So I’m going to lay all the numbers out for you here, and then we’ll discuss. Here is a picture of the actual scratch sheet of paper we did this on (sitting in the airport in Costa Rica):


A Quick Summary of the Numbers

Purchased in 2012 for $95,000 with a 50% down payment ($47,500). Refinanced in 2015 with an appraisal of $130,000 and a 30% down payment ($39,000). You can see both of those at the top of the sheet. On the right side, you then see where when I refinanced, the $47,500 in original loan had to be paid back so that is subtracted from the now $91,000 loan (if no loan had to be paid back, I would have pocketed the entire $91,000). That left $43,500 in profit, and that’s what I walked out with in my pocket.

To be fair, however, the down payment amounts were different between the two loans, so to calculate my true profit, I needed to subtract the $8,500 difference from that $43,500. That leaves me with $35,000 pure profit in my pocket (which also happens to be the amount of appreciation gained on the property in three years, as seen by looking at the difference between my purchase price in 2012 and the appraisal in 2015).

Now, let’s look at this. If you’ll notice, this $35,000 (in only three years) in profit isn’t even taking into account any monthly cash flow I was receiving during that time. This chunk of profit is solely due to appreciation. What about the tax benefits? Depreciation is only calculated on the structure, not the land, so roughly $82,500 is depreciable. The tax calculation calls for this number to be divided over 27.5 years (don’t ask me why), so that equals $3,000 per year. This is the amount that gets written off each year on my taxes.

What does that translate to in terms of cash in pocket? Well, let’s say you are in the 33% tax bracket (we’ll round it to 30% for calculation purposes). This would mean you profit $1,000 (1/3 of the $3,000). So in three years, you could add $3,000 in tax benefit income to the $35,000 in appreciation income. So $38,000 cash in pocket! Again, that’s not including any monthly cash flow from the property, of which it gets about $200/month.

There are some variables left out of all of this that are present in real-life. The first one is fees to finance and refinance. The second is that since the loans were newer, the majority of the mortgage payments I was paying out during those vacancy periods (i.e. lost monthly cash flow months) was interest, which is an additional expense that should be taken out of that profit. But then in my favor, I also left out the additional write-offs on the property for all of the expenses that happened on it. But let’s be conservative again and say all of the left-out expenses totaled $10,000. That is still $28,000 in my pocket, in addition to any monthly cash flow I got.

Related: How I Do My Real Estate Math (Accurately) in Just 10 Minutes

So did I really lose on this property when it had a bad year? Not even close!



Here’s what I really want you to understand after reading all of this. There are multiple ways to earn income on a rental property, and the best risk mitigation you can do in buying a rental property is to buy a property that has a good chance for income in all of these areas. Why? So if any one stream of income fails, you have the others to help keep you afloat.

I thought I was in the negative with this property because of a bad year that caused it to basically tank on the monthly cash flow. However, appreciation and tax benefits took charge and not only kept me afloat, but also allowed me to graciously pocket a pretty penny.

What if you were to buy a property that had no hope of monthly cash flow and only appreciation, and the appreciation ended up not happening? You’d be way into the negative! What if you buy a property that projects having monthly cash flow but it is in a declining market, so instead of appreciating, it actually depreciates, and something happens to your monthly cash flow? You’re in the negative. Tax benefits won’t save you from either of those situations.

What is the best thing you can do? Buy a property that pencils out to provide positive monthly cash flow and is in a growing market (hopefully at the beginning of the “proven” growth cycle). Then you have a good chance of both monthly cash flow and appreciation, so if either of those have hiccups, you don’t suddenly end up in the hole.

And then imagine carrying out this theory of risk mitigation to the strategy of owning multiple rental properties. So we determined one property has three sources of income, so if you have two properties, you have six sources of income. What if one of those properties is a duplex or a fourplex? Add additional monthly cash flow streams for each door. The more doors you have, the more streams of income you have, and the more you can continue to profit if any one of those streams flunks out for some period of time. Holy mother of risk mitigation! Then just make sure you are buying a smart property in terms of quality, price, and location — and you suddenly own the golden egg!

What is your experience with the numbers on your rental properties? Anyone have major cash flow or appreciation wins they want to share?

Let’s talk in the comments section!

About Author

Ali Boone

Ali Boone is a lifestyle entrepreneur, business consultant, and real estate investor. Ali left her corporate job as an Aerospace Engineer to follow her passion for being her own boss and creating true lifestyle design. She did this through real estate investing, using primarily creative financing to purchase five properties in her first 18 months of investing. Ali’s real estate portfolio started with pre-construction investments in Nicaragua and then moved towards turnkey rental properties in various markets throughout the U.S. With this success, she went on to create her company Hipster Investments, which focuses on turnkey rental properties and offers hands-on support for new investors and those going through the investing process. She’s written nearly 200 articles for BiggerPockets and has been featured in Fox Business, The Motley Fool, and Personal Real Estate Investor Magazine. She still owns her first turnkey rental properties and is a co-owner and the landlord of property local to her in Venice Beach.


    • Ali Boone

      Hey Tammy, good consideration. In my experience the payments aren’t thatttt much higher, but they do increase. But regardless of the increase or whatever the monthly payment is, it’s always safest to have a nest-egg to cover unexpected expenses, whether it be repairs or vacancies. The vacancy risk being greatest of course if you have a mortgage payment that has to be paid regardless of whether tenants are in. This goes back some to what I said about having multiple doors…if one door goes vacant, the cash flow from the other ones can often cover the out-of-pocket mortgage expense. This also speaks to the need for making sure your properties actually cash flow too.

      I’d say it’s not as much about how high your income is as rather it’s more about being smart and making sure to have that nest egg. I create my nest egg initially, usually, with income from the properties.

  1. barbara g.

    You talk about:
    cash flow
    Tax benefits

    But I see no mention of paying down the Principal in the monthly mortgage

    Does this principal pay down come into this discussion?
    Some BP people seem discount most of these things

    • Ali Boone

      Hey Barbara, it should have, yes. I got tied up talking about the other things and never brought it up. But yes, equity building is going on the entire time you have the property if you are paying down that mortgage. So that equity build would be tied into principal pay down and appreciation, both.

      Good feedback.

  2. David Spurlock

    Wait a minute Ali!

    I read through your post and several points kept nagging at my thoughts about your writings. I’m probably overthinking this but my accountant said I was on to something. I hate it when he does that because he will never tell my he answer; he makes me elucidate out the answer.

    In the beginning, you paid 47,500 down then after the refi, you paid off the 47,500 loan. In refi, you paid 39k down. You took 86,500 out of the secret piggy bank to achieve those two loans yet you didn’t account for those in your cyphering. In other words, until you put that 86,500 back into the secret piggy bank stash, you can’t start figuring you’re making profit.

    There are some other calculations I have questions about but my accountant won’t let me talk about them until I figure out the down payment conundrum first.

    Being from Vegas, he used his critical thinking mode to make me work it out. Say you walked out of your house with 100$ to go gamble. You were playing and steadily losing until you were down to your last dollar i. e. you were 99$ in the hole. You put your last dollar into the machine and ding, ding, ding you won 110$. So you take 100$ of you jackpot and put it back into your wallet to cover to 100$ that you started with and now you have 10$ in your hand – you have profited 10$, NOT 110$.

    So in your example, you would have to apply the 43,500$ against your first down payment leaving you owing 4000$ to the secret piggy bank to cover the first down payment. This 4k plus the 39k you took from the secret piggy bank for the refi leaves you owing the piggy bank 43,000$ before you can actually start accruing real profit.

    Please tell me if I am thinking something wrong before I go to my accountant and he tears my thinking apart.


    • David Roberts

      Your forgetting the asset that she still has. She’s not at a loss. Also, taking a loan is like getting all your money back and the tenant paying you to hold the house.

      Say you buy a house for 50k and put 25k rehab into it. It ARV at 100k. You take a 75% cash out refi. What did this cost you?

      It cost you nothing. You own an asset that cash flows 400 a month with all your money out. Are you only profiting when you pay off the 75k loan? No. Its 100% profit every month and the loan is tax free.

      Can’t do this with any other asset class that i can think of.

    • Ali Boone

      Hey Dave! See David’s response below. Lol. I was struggling for a second but he hit it. I do totally agree though my gambling profit would have been $10, not $110. But as David mentions, there’s no owned asset in that gambling equation whereas with a house there is.

      (is this a real accountant or like a Robert Kiyosaki Rich Dad type of accountant?)

      • Colton Blessen

        Sorry to beat a dead horse, but after reading Dave’s response I am confused. I understand the example that David gave and that you have an asset now with all of your own money out of of the property. Should I think of “$43,500 profit” more as your money that was initially invested that you now have to go and invest in other properties? I think I’m getting tripped up because I’m thinking of the “profit” you were talking about as cold hard cash in addition to the $50,000 you initially invested. Or is that the way I should be thinking of it?

        Thanks for the post, Ali! I really enjoyed reading it. Also, thanks in advance for the help from anyone willing to help me understand this a little better.

        • Dustin Graham

          David, Colton, I think the number you’ve forgotten is to include the $39,000 in her asset column, which adds to the $43,500 hard cash she has.

          Her initial downpayment was $47,500. Now she has $39,000 in the house and $43,500 in cash. So, $82,500 asset that stated as $47,500, so she is up $35,000 from her initial deposit. (Yes, $4,000 of the initial cash is still tied up in the house.)

  3. John Barnette

    Great analysis Ali. I am one of those lucky SF investors getting great cash flow and appreciation on a handful of properties. I am debating doing cash out refi on one or two of them due to significant appreciation. But weighing the whole cash out vs. Shorter time to 100% loan payoff. And how to appropriately use possible cash out funds in this expensive market. Maybe leverage my sf property to do cash or high down purchases of turn key in another market?

    • Ali Boone

      Hey John. Yayy for hitting cash flow + appreciation awesomeness! 🙂 Can I ask when you bought in SF that let you hit that? And yeah, for the cash out funds…it all depends on your goals. If you want more cash flow, the out-of-states will definitely bode better for that than SF will unfortunately. If you want, shoot me some numbers (like current cash flow and how much cash out funds you could get) and I could give you some ideas on what the math would look like out-of-state.

      • John Barnette

        Mix of more recent acquisitions – 2 short sale purchases that I kept and didn’t flip. One in 4/2011 and one in 8/13. Both home runs. And two others in sf. Both through 1031 with higher equity position at entry to get the cash flow and now with appreciation and rent increases…double happy. One in 2006 and one 12/2013. Also invest in the East Bay suburb of Richmond with two places…one was a short sale and one regular sale mismarketed. Will shoot you private mssg later. Have not talked to any lenders about refi or equity lines. Plus making a new purchase in sf right now and should close this week. Will break even to small cash flow with 25% down. More of a long term buy. Great potential fixed up for big pockets kind of return

  4. Casey Murray

    Another advantage, when using conventional financing to acquire properties, is that your mortgage payment is not subject to inflation. Since the mortgage payment is a good chunk out of your cash flow each month, this has great savings over the long haul. Great article, Ali.

  5. This is a great article for the newly-minted real estate investor. I started out investing in real estate as a hobby, but woke-up one morning realizing it was a career. There are [potentially] multiple buckets of profitability in real estate investing, but seeing how passive and active income are taxed turned my hobby into a career.

    I spent 25-years in a national sales role making great money, only to see a significant portion of it go to taxes. I have been living solely off passive income for the past 10 years. I call it my get-rich-slow program; that is, it doesn’t provide the same level income that my sales career produced, but it offers significantly more “long-term” advantages. I live in a beach community that offers both cash flow and appreciation, which is a great combination for the buy and hold investor. It certainly beats living out of a suitcase five nights a week.

    • Ali Boone

      I love that Randy, thanks for sharing! It actually made me smile while I was reading it 🙂 I’m with you–I’m in it for the long-term benefits and the benefits along the way….like sleeping in as long as I want to, making my own work schedule, and not having to report in to an office on a Monday.

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